Sizzling tenancy demand revives purpose-built rental sector

by Neil Sharma on 23 Aug 2019

Toronto developers have long favoured building condominiums at the expense of purpose-built rental apartments, but that is beginning to change.

Chronically low vacancy rates in Metro Toronto have caused rents to spike in a mere matter of years, thereby providing developers the economic panacea that has eluded the purpose-built rental market for decades.

“More groups are looking at rentals simply because rents keep rising, and if you look back five or 10 years, condos were more lucrative and that’s because rents weren’t at a level that allowed rental apartments to compete with them,” said Keith Reading, director of research at Morguard. “If you look at Toronto especially, but most of the country’s major cities, rents have gotten to levels whereby rental apartments have become better propositions financially, and especially over longer terms, because the money coming in doesn’t stop, whereas with condos it does stop.”

Condominiums still make sense for developers because of the expeditious exits, but tempests have emerged in the retail sector and REITs—which typically don’t have development experience—are starting to diversify their portfolios.

“If you’re looking at the longer term and you’re a REIT, like RioCan, there’s a lot of change and certainly some headwinds, with income for retail developers uncertain going forward” said Reading. “They’re looking to buffer against what should be declining income, and a great way to do that is to develop rental apartments because they get long-term rental income and it augments their retail income, which is flat and declining.”

When investing solely in the condominium market, there’s little, if any, protection against a slump in the market or even just the sector. However, rental income, which is consistent and well-nigh guaranteed to rise over time, is a safety net during times both thick and thin.

“The reality is during an economic downturn, apartments tend to perform quite well, and the reason is when people are concerned about the economy—and about their jobs—they won’t purchase single-family homes or condos. In that way, your income from apartments is pretty constant,” said Reading.

“Rental demand is much stronger than supply, so you’re definitely looking at rent growth going forward, and that’s what some developers are paying attention to. There are so many condos being built at the moment that the market is extremely competitive, but that’s not the case with rentals, where there’s less competition and less supply.”

Today’s purpose-built rental units in Toronto look nothing like those built between the ‘60s and ‘80s—inside and out, they resemble condos—which is one reason the rents commanded are ameliorating the economics for developers. One such building, The Livmore, in the heart of downtown is a luxury purpose-built rental, and while it’s rent-controlled—because it was developed before the Ontario government repealed rental increase caps on new builds—voracious demand for its units helped reverse the city’s condo-only mentality.

“Even five years ago, we were in the midst of a condo boom because developers weren’t being handcuffed by how much money they could make. Now the pendulum has swung back because without rent control you could theoretically raise rents as much as you want,” said Todd Nishimura, senior director of marketing, leasing and communications at GWL Realty Advisors.

“We’re seeing conversions now—projects that started as condominiums started turning into rental apartments once rent control was lifted.”

The Livmore was developed by GWL Realty Advisors, a subsidiary of an insurance giant that also came to the conclusion purpose-built rentals are excellent for portfolio diversification.

“We’re owned by a large insurance company, Great West Life, and multi-residential has become more attractive because it’s consistent cash flow,” said Nishimura. “Your return may not be as large as in a condo—although you have to get a condo right and hit the market at the right time—and your short-term investment on a condo is higher than with purpose-builts, but the latter is more reliable because people will always need places to live.”

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